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Abstract

Team incentives have been found to be particularly effective both
in the lab and in the field despite the moral hazard in teams
problem identified by Holmström (1982). In a newly developed
virtual workplace, we show that, in line with Holmström, moral
hazard in teams is indeed pervasive. Subsequently, we find strong
evidence for the conjecture of Kandel and Lazear (1992) that
peer pressure may resolve the moral hazard in teams problem.
Organizations equipped with a very weak form of peer monitoring
(anonymous and without physical proximity, verbal threats or
face-to-face interactions) perform as well as those using individual
incentives.